Employment over GDP: Why slowing growth isn't worrying Chinese policymakers

Shanghai: As China’s economy slows towards its weakest growth in a quarter of a century, policymakers have comforted themselves that unemployment remains low, and with it the risk of social unrest.

Indeed, the jobless rate has become China’s key indicator, with Beijing saying it does not matter if economic growth falls short of a 7.5 percent target this year, as now seems possible, as long as employment holds up.

Analysts do see some risks building, with reports of provincial resistance to consolidation in employment-heavy manufacturing industries, and workers being kept on the payrolls of inefficient “zombie” firms, but don’t see a crisis for now.

The official urban unemployment rate was 4.07 percent at end September, barely changed from 4.08 percent three months earlier, but even the government thinks that understates joblessness and is busy testing a wider survey-based measure.

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“Despite sluggish growth and continued credit market woes, the labour market remains remarkably stable - with hiring steady, the jobs outlook stable and profit margins rising at the their fastest pace in a year,” said Leland Miller, president of China Beige Book International, citing the result of the research firm’s third-quarter private survey.

Chinese media are noticeably short on the stories of mass lay-offs, padlocked factories and worker riots that were headline fodder in 2009 as the global financial crisis led to a collapse in export orders.

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And while both the government and HSBC/Markit Purchasing Managers Indices (PMI) show manufacturing employment contracting in 2014, wages have risen.

“High growth in wages is not consistent with rising unemployment,” said Michael Pettis, a professor at Peking University’s Guanghua School of Management.

Anecdotally, many company executives complain of difficulty finding workers.

“We have to add jobs,” Jazy Zhang, CFO at Shanghai-based videogame maker Giant Interactive Group, told Reuters, adding that even enhanced labour protection laws making it harder to get rid of underperforming workers had not discouraged them.

“We are in the talent business. We have to pick our battles.”

She said her company, which employs more than 1,500 people, has raised average wages by 12-15 percent annually in recent years and expected to maintain that pace in the near future.

REASON FOR CONCERN

Giant’s experience reflects, in part, the attempt to shift the world’s second-largest economy toward higher-value services and away from its traditional growth engines such as manufacturing.

For example, data show that while agricultural employment has declined and mining jobs have stayed flat, hiring in service-oriented sectors such as IT, real estate and retail is growing at a brisk 20 percent.

But there is still reason for concern, economists say.

For one thing, there are strong sectoral and regional disparities. A recent visit by Reuters to the northern city of Qiqihar revealed that some factories had put workers on subsistence wages. Others have simply stopped paying. [L3N0S426Z]

“Fifty percent of coal companies are not paying their employees on time. Do you count that as employment?” said Andrew Polk, a Beijing-based economist at the Conference Board.

“If people are still working but feeling poorer, that’s a problem,” he said. Wages are needed to drive more domestic consumption - another reform goal that itself drives job creation.

The number of labour incidents related to back pay in China has jumped in the second half of the year, according to data compiled by China Labour Bulletin, a Hong Kong-based NGO that works with mainland labour rights organisations.

It has recorded 259 such incidents in the media since July, compared with 148 for the first six months of the year, although it is fairly certain there are more incidents than appeared in press and social media, spokesman Geoffrey Crothall said.

Another issue is the preservation of jobs better off eliminated, an unpleasant but unavoidable effect of economic restructuring.

Local officials have proven highly resistant to consolidating sectors such as steel, glass and cement, given it will be they, not reformers in Beijing, who have to deal with the fallout on the ground, in particular concentrated unrest from lay-offs.

At the same time, laws protecting workers enacted over the last decade act as a short-term disincentive to restructure and a deterrent to investment in more profitable lines of business - and better jobs.

“I run into people all the time who say, ‘I bought a Chinese business, and I’m going to restructure it to make it work. And the way I’m going to make it work is I’m going to eliminate a third of the jobs,’” said Steve Dickinson, a Chinese labour law specialist at Harris Moure in Qingdao, but added that the laws make it practically impossible to do so.

“Maybe those workers are redundant, maybe they’re useless, but the government doesn’t want them on the street.”

Reuters